It wasn’t all plain sailing for the economy last year, and it may be even more challenging this year. Nevertheless, local fund management companies remain optimistic and will continue to look for investment opportunities. Find out more in the second part of this series.

IN view of the outlook for 2015, asset management firms have devised various strategies to ride out the volatility. AmInvestment sees some trading opportunities over the next three to four months and has identified some upside potential, as investors focus on earnings growth this year. It also foresees increased market volatility and downside risks due to the impending GST implementation and uncertainties over a potential US rate hike. 

“We will be more defensive at this point and stay with dividend-yielding stocks. On top of that, we will track quarterly results closely for guidance and change our strategy accordingly, based on the latest earnings results,” says Wong. 

“We are overweight on the construction sector and will be selective in the oil and gas and plantation sectors. We are neutral on banks and underweight on consumer and property sectors.”

On the bond market, Goh believes the overall environment will be supportive despite the potential volatility. Stable interest rates, less inflationary pressure, lower but stable GDP growth and active measures by the government to manage fiscal concerns are some of the factors that may support local bond yields in 2015, she says. “We are maintaining high exposure to bonds, and seek high quality, lower-rated bonds to buffer the expected volatility.”

Given the limited near-term upside for the Malaysian stock market, Pacific Mutual has positioned its funds in low-beta stocks for now. CEO Gary Gan says it will focus on government-linked companies that can potentially meet the government’s request for higher dividends, companies that benefit from the weak ringgit and stocks trading at near trough valuations.

“Although poor earnings growth and visibility will cap any major upside in the near term in the local market, we see the potential market weakness due to these factors as good buying opportunities,” says Gan.

“As we see the likelihood of crude oil prices bottoming out towards the middle of 2015 due to slower supply growth from non-Opec (Organisation of the Petroleum Exporting Countries) producers, we will be increasing our exposure to fundamentally strong oil and gas stocks on further weakness.”

While investors can take advantage of weaker oil prices by increasing exposure to the oil and gas sector, AmInvestment’s Goh is cautious about the implications of this for the bond market.

“In our view, bond investors are more concerned about the impact of falling oil prices on the macroeconomic level, as this would potentially determine the credit rating of Malaysia. A rating deterioration may see global investors shying away from Malaysian bonds,” she explains. 

“We are wary of the potential weakness in the oil and gas sector and are not looking to increase exposure until there are material changes to our expectations.”

The weakening ringgit is also a rising concern. Hoe Cheah How, chief investment officer at RHB Asset Management Sdn Bhd, says its strategy for tackling this is to invest in companies that stand to benefit from the trend.

“One such opportunity would be to invest in export-based industries with the right cost structure that reaps the benefits of low raw material costs amid lower commodity prices,” he says. 

“We aim to select companies that are able to thrive under various economic cycles. Our funds will stay invested, taking into consideration global macro developments, and we will continue to seek investments in undervalued securities, based on our structured ‘top-down, bottom-up’ approach.”

Hoe says the biggest risk associated with a weakening ringgit is the potential outflow of foreign funds from local markets. Last year, he observed that the local equity market suffered a huge outflow of foreign funds, while the local bond market witnessed foreign fund outflows for the first time since 2009 amid various economic headwinds and negative news.

This year, he does not anticipate a massive exodus of foreign funds from the local markets, like those seen in 2014, as Malaysia appears to be better positioned to manage such volatile capital flows. 

“The presence of healthy backstops, such as pension funds and insurance companies, as the market stabilises will help smooth out some of the anticipated volatility. Given the ample domestic liquidity, buying on dips will lend support to the local financial markets, as any excessive downward movement in asset prices will lure bargain hunters.”

Despite its best laid plans, RHB speaks of three major risks that could affect the outcome of its investment strategy — a potential fallout in the eurozone, stemming from deflationary forces, social discontent and political tension; a sharp rise in the US dollar over the next 12 months that could be of significant risk to global economic growth and affect dollar liquidity globally; and a sharp deterioration in China’s growth momentum that could severely impact emerging markets as its US$9 trillion GDP is a strong export market for emerging economies.

“No risk can be fully hedged, but investing in stocks with strong fundamentals, sustainable business models, and solid execution and track records will protect our portfolios against downside risks. The right credit selection and appropriate duration positioning remain critical for bond investment,” says Hoe.

This year, asset managers are overweight on sectors such as telecommunications, construction, technology and utilities, as well as selected oil and gas counters. 

The construction sector is favoured as it stands to benefit from the continued rollout of infrastructure and development projects committed by the public and private sectors. The recent budget revision saw no cut in the RM48.5 billion development expenditure, which bodes well for the sector, as projects like the mass rapid transit, KL-Singapore high-speed rail and Pan Borneo Highway will be awarded and constructed as planned. The 11th Malaysia Plan that will be unveiled in May will also provide positive newsflows to the sector. 

Another favoured sector is power and utilities, mainly for its defensiveness and earnings visibility, benefitting from the currently low commodity prices. Investors looking for exposure to the recovery in global demand are bullish on the technology and manufacturing sectors as they are key beneficiaries of the global economic recovery and strengthening US dollar.

Finally, many are cautiously optimistic about the oil and gas sector, as crude oil prices are expected to bounce back this year. “As oil prices tumbled late last year and have yet to fully bounce back, there will be minimal downside risk to oil prices,” says AmInvestment’s Wong. 

“Forward prices for oil are priced at US$60 to US$70, indicating that the market is expecting a reversal in oil price movement. We may not be able to time the recovery of oil prices but at current levels, we think value is emerging for the sector.”

For the most part, industry players are most bearish on the consumer retail and financial sectors. The impending GST implementation is likely to weaken consumer spending, and banking stocks are not favoured because of slowing loan growth, net interest margin (NIM) compression and asset quality pressures, with margins to remain flattish. Non-performing loans are also expected to rise going forward. 

Despite the economic environment and outlook, investors are advised to remain invested with a long-term mindset, instead of cashing out or maintaining high cash holdings.

“Despite the challenging global macro outlook, we still see bright spots in various asset classes. Lower commodity prices will manifest in lower inflation in most parts of the world, which provides breathing space for central banks globally and, hence, room for monetary policy easing bias,” says Hoe, who shares RHB’s house view of Bank Negara maintaining its overnight policy rate for the rest of 2015.

This bodes well for local bonds, as conservative investors seeking a stable income stream could consider investing in this asset class, he says. Value can also be found in equities despite the market volatility. 

“We envisage Malaysian equities performing and growing decently, albeit slower than some markets in Asean and North Asia,” says Hoe. “Investors who are able to stomach short-term volatility while seeking growth may consider Malaysia or regional equity funds, as economic growth in this region is expected to be higher than in its more developed counterparts.”

Pacific Mutual’s Gan opines there are returns to be made on the unit trust scene and in the Malaysian stock market. “Because of the sharp fall last December, we entered the new year with a reduced market price-earnings ratio (PER) that was close to the historic mean, which is expected given the perceived risks before us,” he says. 

“However, ascribing a discount to the historical mean PER would be over-penalising the market, considering the prevailing low interest rate environment. Based on expectations of the market’s earnings-per-share growth of 7% for 2016, we are targeting at least 8% one-year return for our local equity funds. We think this target is not overly demanding as we maintain a mean PER valuation relative to history in arriving at the target.”

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 16 - 22, 2015.

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